Optimal capital structure You are in charge of the finance department at Johnny’s Kawasaki, Inc. The firm is considering expanding to Europe and will build a plant in London. The plant will cost approximately $14 million. Your duty is to identify the optimal capital structure with which to pay for the $14 million dollar project. After months of work, you have identified the following data.

In addition, the expected return on the market is 9 % and the risk-free rate is 3 %.

(a) Of these options, which capital structure is best?

(b) Given the optimal capital structure, how much will obtaining this $14M in funding cost the firm?

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Option 1 234 ..you will have... If you have debt of... Cost of debt Beta $2 million $5 million 6.67% .76 7.25 % .81 $7 million 8.19% .92 $10 million 9.65 % .98